How to settle on the right deductible for auto insurance

Auto insurance deductibles are one of the most commonly misunderstood parts of an auto insurance policy. Simply put, the deductible is the amount you pay from your own pocket in an event of an accident.

Yes, your insurance company will cover the cost of repairing or replacing your vehicle, but you have to contribute as well. And, somewhat unfortunately, your contribution will always come before the insurance company’s. Why does the order matter? Let’s look at some examples.

First, let’s say you are involved in a collision. The cost to fix your vehicle is $1,500. If your deductible is $500, your insurance company will pay a total of $1000, and you my friend, would be responsible to pay the remaining $500.

If the damage was to cost $10,000, you’d still only pay $500. The deductible does not scale as a percentage; it’s fixed. But this also means that if the damage was $501, you’re still paying $500. That’s why it matters that your deductible is used to cover costs before the insurance company makes a contribution.

“Then I’ll just chose the lowest possible deductible,” you might say. That way the insurance company will have to pay for all but the most minor of damages. That’s fine, but low deductibles mean higher monthly premiums. That’s why settling on the right deductible is a difficult concept. The higher you set it, the more you save, but the greater the cost when you need to make a claim.

Determining exactly where to set your deductible is an inexact science. You may generally be a safe driver, but you never know what might happen. Banking on an accident never occurring could leave you financially vulnerable if you ever need to make a claim.

So while there is no, “This is the perfect deductible for someone like you” advice to give, we do have some tips for where you just set your deductible. One way to look at it is to assess yourself in the same way an insurance company might.

Use criteria like driving history – how often have you made claims in the past? Have you racked up any driving violations? How long is your daily commute? Do you use your vehicle for long-distance trips on anything resembling a regular basis?

Determining the likelihood of an accident is obviously a difficult game, but by using these factors you will be able to see how risky a driver you are considered by an objective set of criteria. If you have a history of claims, live in a neighbourhood with a high crime rate and commute an hour each way to work, you may want to set your deductible lower. If you barely use your vehicle, a higher deductible is probably your best option.

The other consideration should be the amount you save by increasing your deductible. If you move it up $200, how much will that save you every month? If only a few bucks, keeping the deductible lower is probably your best option. If it’s $15, you’ll only need to go a little over a year without a claim to make the higher deductible worthwhile.